With the expiration of the federal Home Affordable Modification Program (“HAMP”) in December 2016, struggling borrowers have had to turn to standard in-house loan modifications for relief from financial hardships. In-house modifications have been a staple of American banking since well before HAMP. A primary benefit of HAMP, however, was the standardization it provided to lenders throughout the industry. Before HAMP, loan modification processing procedures varied with each institution, and applicants had little room for review of a private denial outside of the legal safeguards built into New York State foreclosure legislation. HAMP’s expiration, however, has not brought a corresponding decrease in financial hardships. The question then remains as to whether a return to in-house modifications will result in an increase in arbitrary denials and roadblocks for struggling New York borrowers.

New York Law and the Proprietary Modification Process

New York law actually defines the term “loan modification” as a “waiver, modification or variation of any material term of the mortgage loan, irrespective of whether the duration is short-term, long-term or life-of-loan, that changes the interest rate, forbears or forgives the payment of principal or interest or extends the final maturity date of the loan.” Furthermore, New York banking regulations actually require lenders and loan servicers to make reasonable and good faith efforts to pursue loan modification options with a defaulting or struggling borrower, but only under the following circumstances:

• The borrower demonstrates “imminent risk” of default or has defaulted as a result of “financial hardship”; and
• The anticipated income during the life of the modified loan is greater than the value the home would bring in a foreclosure sale.

If pursuing a modification, the lender is supposed to structure the modified payments such that they are both affordable and sustainable for the borrower. HAMP guidelines used to recommend monthly payments be no greater than 38 percent of the borrower’s debt-to-income ratio, but there is no direct provision for such in New York’s banking regulations. The law does, however, state that good faith on the part of the lender is presumed if the loan modification was offered in accordance with HAMP guidelines or United States Treasury directives. Failure to do so on the part of the lender during a private modification is not bad faith in itself, but it would require closer scrutiny during the foreclosure process to ensure the modification offer or denial was in accordance with principles of fair dealing. In New York, loan servicers are prohibited from engaging in unfair or deceptive business practices, including misleading you regarding the nature of your loan’s terms and refusing to communicate with your attorney or an authorized representative, such as a not-for-profit mortgage counselor. Any denial of a loan modification that was not processed in accordance with HAMP standards, therefore, is at least grounds for judicial review.

Good Faith Modification Standards

Because New York courts put an emphasis on keeping defaulting borrowers in their homes, loan modification denials are scrutinized in accordance with HAMP standards. This means that the reviewing court will look to the following:

• Whether the offered reduction is less than 38 percent of the borrower’s DTI ratio or 31 percent of his overall income;
• Whether the arrearages were capitalized;
• Whether the interest rates were reduced, with a 2 percent floor, to accomplish the monthly income payment target of 31 percent;
• If the monthly income-to-payment target cannot be reached with an interest rate reduction, whether the loan term was extended for as long as 40 years so as to meet this goal; and
• Whether the lender considered forbearance with a ballooning payment or partial forgiveness.

If a lender did not consider these solutions in good faith, then your Long Island foreclosure and loan modification attorney may have grounds to petition for a stay or dismissal of your foreclosure action. This is, however, only if you would have qualified for a HAMP modification in the first instance. If some borrowers believe a loan modification denial was arbitrary, it may instead come to light that any such modification would have been a nullity on the part of either the lender or borrower.

Arbitrary v. Non-Arbitrary Modification Denials

As set forth in New York regulations, loan modifications create affordable and sustainable payment schedules for defaulting borrowers suffering from financial hardships. But what happens after an initial review of your loan terms by your lender reveals that you are only spending 29 percent of your monthly income on your mortgage payment? If the bank modified your loan under HAMP standards, it may result in a capitalization of arrears—but a higher monthly payment overall. In this case, if you are claiming that you cannot afford your current monthly payment, then your modification may be denied at inception.
There are additional reasons why lenders can deny an in-house loan modification request without meritorious review. If, for example, you were granted a loan modification during the past twelve months, the lender may assume that if the initial loan modification was not sustainable, neither party would benefit from re-modification.
Another reason for denial—often confused with an unmeritorious denial—is the length and extent of your arrearages. If it is not financially feasible to capitalize your arrears or it appears to the court that you have made no effort to make affordable payments on your mortgage, then this may also be considered a meritorious denial of the modification.
In these cases, you may need to consider additional loss mitigation options, such as deed-in-lieu of foreclosure or a short sale of the home. Although it may seem arbitrary, denial on this ground would likely not be considered to have been in bad faith.
New York courts do, however, consider denials arbitrary if the modification is denied on grounds of missing documentation such that the request itself was never reviewed on the merits. Because income and asset documentation are essential in applying for a loan modification, a defaulting borrower will generally be given the opportunity to obtain and supply any necessary documents to the lender for meritorious review.

Contact a Long Island Loan Modification Attorney with Questions

If you were denied a loan modification, received modification terms that were impractical for you, or a foreclosure complaint was filed against you, discuss the merits of your modification with a qualified New York mortgage and foreclosure attorney right away. Even though in-house modifications are discretionary, New York courts still look to the standards set by HAMP to determine whether your lender has worked with you in good faith. What seems like an arbitrary denial to you may not, in fact, have been arbitrary at law. However, the goal in New York is to keep you in your home, and the law is designed to help you achieve an affordable and sustainable loan modification.
If you have questions regarding a modification denial or application, contact Ronald D. Weiss, P.C., Attorney at Law, immediately. As an experienced loan modification, mortgage, and foreclosure attorney in Nassau and Suffolk Counties, he can analyze the specific facts of your case to determine whether your lender has illegally denied you a fair loan modification. Contact us online or at (631) 271-3737 for a confidential, no-risk consultation.